Thursday, 17 January 2013

The government gave fuel retailers some leeway on Thursday to raise prices of heavily subsidized diesel, distancing itself from an unpopular policy ahead of elections while trying to revive an economy growing at its slowest pace in a decade.

The government emphasized that any price rises would be small, raising questions over how much freedom the state-run oil firms will really have. Petrol largely remained under government control after a similar policy was introduced in 2010.

Oil minister Veerappa Moily said the new system gave oil companies some liberty to set prices, but cautioned that diesel subsidies could not be suddenly ended.

"We cannot abruptly put an end to the subsidy or the under-recovery. Looking into all the economic aspects, we have taken the decision to give oil companies the liberty to make small corrections," he said.

Share prices rose sharply in India's main oil marketing companies, which suffer losses selling fuel below cost. The rupee hit a one-month high, while yields on Indian bonds dropped in a sign the market expects the new policy will result in lower subsidies in the medium-term.

The government also loosened a cap introduced in September on the number of subsidized cooking gas cylinders permitted to each household after widespread criticism the quota was unfair on the poor.

The cap will now be nine cylinders per year, up from six. That is expected to add 93 billion rupees ($1.70 billion) to the annual subsidy bill, an oil ministry source said.

Citing an impact on the market, this could raise concerns for all diesel vehicle owners as a small yet continuous hike of diesel prices starting within next couple of days.